Sale of Rental

[RLymanC]

Client came in that sold a rental unit that was gifted to him 10 years ago with a FMV of around 50,000 with land value at the time of $30,000. The house was just a shack in pretty bad shape. No improvement costs involved.

He has never reported the gross income or expenses. His only income is social security and after talking with him the net income would not produce a taxable income, nor would it produce taxable social security income so I feel a 1040X should not be involved.

Would it be OK just to calculate the allowable depreciation and report the sale on 4797? Sale price was reported on 1099-S as $150,000. I can get county appraisal for the rime of the gift, and also real estate comparable sales at the time of the gift.

Not much value in the dwelling, the lot costs in the area would warrant the $150,000.

[ED SMITH]

Since it was a gift, you need the donor's basis of the property, not the FMV. This may be more difficult, if not impossible, to ascertain accurately. It may come down to making a reasonable guess/estimate.

Take the 'catch up depreciation'. There is a line for it on 4562.

If the addition of the rental income and expenses to the earlier years doesn't result in an increase of $50 in taxable income or $14 in tax, don't bother with amending.

[Gretel]

Agree, you need to find out about original basis in donors hands. And yes, I would calculate depreciation allowable on form 4797.

Of course no depreciation catch up can be taken if no income is reported.

[RLymanC]

Basis

My bad, I ment to write donors cost.

Thanks for your reply, I'll simply calculate the the depreciation based on the donors basis and go with it, plus the expense of sale

Smooth sailing in the coming months...HA

[Kram BergGold]

Suggestion

As the building was a shack I would allocate most of the cost basis to land. Remember, if the donor had been renting the place before the gift, the cost basis to the donee is reduced by that depreciation and this depreciation and any from the last 10 years will become section 1250 gain to him.

[VT-EA]

Accounting method

No improvement costs involved.

He has never reported the gross income or expenses. His only income is social security and after talking with him the net income would not produce a taxable income, nor would it produce taxable social security income so I feel a 1040X should not be involved.

Can it be said when he got the rental unit he adopted an accounting method that capitalizes the real estate taxes?

[BHoffman]

I have a gifted rental property as of 07/01/15. Basis was $136k. The donor will file form 709, but won't owe any tax due to the applicable credit amount.

The donor died in February, 2016. The donor and donee were a long-time unmarried couple.

The donee did not rent the property to anyone. He paid $8k for improvements.

The donee sold the property on 12/11/15 for $130k

I'm think the donee's basis is $138k: The lower FMV of $130k on the date he received the gift plus what he paid for improvements.

So, he has a short term capital loss of $8k. Is that right?

[Roland Slugg]

I'm (sic) think the donee's basis is $138k: The lower FMV of $130k on the date he received the gift plus what he paid for improvements.

If the property's FMV was $130k when it was given to him, then you are correct.

So, he has a short term capital loss of $8k. Is that right?

Probably not. Date "basis" includes the time the gifted property was owned by the donor, so your client probably has a LT loss, not a ST one. But it may be an ordinary loss, not a capital loss. You said it was rental property, but then said it wasn't rented. So what was it? Rental property? Investment property? The house he lived in? Makes a difference.

Suggestion: It's not a good idea to ask an entirely new question in a reply to another thread. Better to start a new one.

[Roland Slugg]

Would it be OK just to calculate the allowable depreciation and report the sale on 4797?

If it was my client, I'd simply report it on Schedule D (via F-8949) as a sale of land. No depreciation issues. Basis = $50,000 ... SP = $150,000 ... LTCG = $100,000.